Analyze the effect of combined changes in Agg. S and Agg. D on the econ.

Question 1

Inc Pl means

Answer 1

Workers real wages have decreased

but in SR, output inc. which Demands more L, which lead to increased money wage demands which lead to restoration of macro full emp but less goods are now supplied and services too at each price level. And inc. in resource prices causes SRAS to shift to the left.

Question 2

Adjustment to increase in Agg.D;inflationary gap

Answer 2

SR inc. Plever, SR inc. Output = excess supply = excess labor- SRAS moves down and right as excess supply of workers decrease wage thus decrease Plevel

+Cyclicals, commodities, lower quality fixed in anticipation of lower default risk in an expanding econ

-Decrease exposure to Fixed Inc, defensive companies

Question 3

Adjustment to dec. in Agg.D;recessionary gap

Answer 3

+Inv defensive companies, investment-grade and Gov Fixed Inc securities (which benefit as interest rates decline), Long-maturity fixed inc sec cuz their prices react more to falling interest rates than do short-maturity securities.
-Inv cyclical companies, lower quality Fixed Inc, commodities and their producing companies because of lower commodity demand and lower commodity prices (according to ISLM ofcourse)

Question 4

Stagflation (higher inflation and higher nominal interest rates)

Answer 4

-Fixed Inc secs., -equities, +commodities

Stagflation; High unemp, increasing inflaton;sharp decrease Agg.S;Supply shock;-GDP, +Plevel

Gov intervention should help to shift Agg.D

Policy changes to -inflation will +unemp
Policy changes to fight recession will +inflation